Sresta Natural Bioproducts

SRESTA NATURAL BIOPRODUCTS PVT LTD

Company Report: India-Organic Food-Unlisted 18 APRIL 2016

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COMPANY BACKGROUND

Beginning

Incorporated in March 2004, Sresta Natural Bioproducts (Sresta) is a leading organic produce company of India.

Among the organic food companies, Sresta is among the better funded, having raised several rounds of equity funding from 2 different VC funds – VentureEast and Peepul Capital. Together, the two funds own over 70% of equity of the company, and appear to have pumped in close to Rs 400m.

Powered by VC funding, Sresta has reported strong

growth. In the 5 year period from 2010-15, it has

grown from a revenue of Rs 101m to Rs 1135m, a

CAGR of over 60%.

The company has worked to create both backward and forward linkages. It sources products from over 25,000 farmers working an area of 1,50,000 acres. It sells its products from 10,000 plus retail stores now, under the brand 24 Mantra. It is rapidly expanding both as it grows.

The company employs over 250 people currently.

Key Company Info

Corp Identity Number U01122TG2004PTC042837

PAN Number AABCH9484P

Auditor Gandhi & Gandhi

Board of Directors Name Designation Date since

Seelam Rajshekar Reddy Managing director 09/03/2004

Balasubramanian Narayanan

Whole-time director & CEO 05/08/2010

Sarath Naru* Nominee Director 12/03/2010

Mohana Krishna Reddy Director 30/08/2013

Deepak Mittal# Nominee Director 08/03/2016

*Nominee – VentrureEast; #Nominee - Peepul

Address

203, PAVANI ANNEXE,ROAD NO.2, BANJARA HILLS, HYDERABAD - 500034, ANDHRA PRADESH

Financial Summary

Year ending June 30 FY13 FY14 FY15

Net Sales (Rs mn) 460.8 796.3 1,134.8

PAT (Rs mn) 1.9 2.1 4.9

Net worth (Rs mn) 346.1 452.9 713.3

Debt (Rs mn) 1.4 2.0 35.7

Sales Growth (%) 70.7 72.8 42.5

PAT Growth (%) 3115.0 6.8 137.5

ROE (%) 0.6 0.5 0.8

ROCE (%) -0.7 -4.7 3.9

D/E (x) 0.0 0.0 0.0

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India-Organic Food-Unlisted Sresta Natural Bioproducts 18-April-16

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Promoters

The key promoter is Seelam Rajshekar Reddy. In 1992, Raj Seelam was working in an agricultural products company, when he observed the alarming use and spread of chemical usage on farms, and the deep impact it had on rural indebtedness. Investment in pesticides and synthetic fertilisers meant farmers had to borrow money, which in turn was affecting the very sustainability of the farmer’s life and standard of living.

This sowed the seeds for Sresta. With a group of inspired colleagues, he set out on a lifelong journey of passion and commitment.

The two VC funds backing Sresta owned close to 70% of common equity as on Mar’15.

Apart from the above, there were un-converted CCPS share as following:

As of Mar’15

After Mar’15, VentureEast Life Fund III LLC put in another tiny tranche of 91,028 CCPSs. Accounting for their conversion, the fulling diluted shareholding of Sresta could look like this currently:

The 2 funds will end up owned 76.1% at full conversion, up from 70.7% as on 31.3.2015. BUSINESS HIGHLIGHTS

Procurement

Sresta has a unique farming model: One which ensures alignment with processes and allows for round the year supervision.

The farming is currently organised into 30 or so projects. Spread in a radius of 15- 20 kms, the farms acreage could range from 200 to few thousand acres. Typically for every 100 – 150 farmers it has a Supervisor.

Sresta procures the crop from the farm. Procurement Centres are set up at the sites and farmers are contacted directly without any middlemen. In fact the payments are all done through banks and online transfers to ensure authenticity and transparency.

Sresta’s teams check out the farmer’s knowledge, attitude and more importantly, whether he has an adequate understanding of sustainable living.

Then comes the choice of the right soil – finding that particular soil well suited for a particular crop. Sresta’s people check the soil quality, cropping pattern, prevalent crop rotation and the nutrient levels in the soil. This determines the matching of the soil to the crop. While doing this, it ensures the region has a suitable weather and temperature.

Right land, right soil, right farmer and the right crop. That done, the next steps, are the right seeds. This is followed by the right farming and cultivation practices. Natural solutions to control pests, locally nurtured wisdom and an organic connect with the land, crop and nature are all Sresta’s dynamics and efforts at details. Storage is done through environment control and effective storage techniques are a result of homegrown wisdom, usage of local resources and proven learnings accumulated over a period of time.

Processing and storage

Sresta’s central storage and processing facility is located in Hyderabad with regional storage centers across various States. India’s first ECO2 treatment



facility (Non Chemical fumigation system) has been installed by Sresta.

Grain Cleaning

Sresta has a state of art facility with pre-cleaners, aspirators, fine cleaners, gravity separators, destoners, suction blowers, sortex machines, dryers to clean , grade and pack grains of high purity. This set-up enables the farm grade material to be cleaned to a super clean material.

Fumigation

Sresta’s team after years of research has developed the technology of using the safe carbon dioxide modified atmosphere to treat the grains and to prevent infestation. No chemicals are used for fumigating the grains and spices. This makes the sresta products even more safe and pure.

Flour Milling

Sresta’s whole wheat flour is ground in the traditional Chakki mill to give the taste and texture that is most preferred in the Indian homes. This traditional technology ensures that the natural balance of bran, germ and endosperm is kept intact in the flour. Sresta’s Whole wheat flour has maximum fiber content than any other whole wheat flour of other brands.

Sresta understands the need for handling allergens separately to avoid contamination and to deliver safe food its customers. All the non-glutinous grains like Sorghum, finger millet, chickpeas, maize, rice are handled in different line where they do not come in contact with gluten containing grain.

Aseptic processing

Sresta processes organic fruits into aseptically packed pulps, purees, juices and concentrates at audited and certified units with world class equipments and facilities. Facility is certified for Aseptic pulp lines have the capacity to process and pack 10 MT/ hour. Facility is certified for Kosher, ISO:22000 and FSSAI. Processing facility has a well equipped lab and trained technicians to continuously monitor, evaluate and process the product. All tropical fruits like Alphonso Mango Pulp, Totapuri Mango Pulp, Kesar Mango Pulp,

White guava pulp, Pink Guava Pulp, Pineapple pulp and Juice, Red and Yellow Papaya Pulp, Banana puree are processed and packed.

Aseptic fruit concentrate line has a capacity of 6MT/hour. Clarified Mango juice concentrates, Mango Pulp Concentrates, Pineapple juice concentrates are also processed and aseptically packed.

Individually Quick Frozen

Sresta processes IQF at a one of the kind facility certified for BRC-Global Standard Food Safety. Sresta processes organic IQF mango dices, slices, Papaya dices, cubes, pomegranate kernels, banana slices and vegetables. Development team ensures that specifications as per the customer requirement are handled with ease. Processing facility is situated close to our project areas to maintain the ‘Just Picked” freshness of the fruits and vegetables.

Brands

Sresta markets under the 24 Mantra brand. Under this brand, it sells as many as 200 products: 5 types of Rice 2 varieties of Poha 22 varieties of Spices 20 varieties of Dals/Pulses 14 varieties of Atta/Flours 4 varieties of Cold Pressed Oils 2 varieties of Sugar 2 varieties of Jaggery 4 varieties of Juices 5 varieties of Breakfast Flakes 5 varieties of Masala Powders 5 varieties of Masala Powders 3 varieties of Health Products 3 varieties of Jams 4 varieties of Ready to Cook Pastes 5 varieties of Teas 2 varieties of Papads 4 varieties of Cookies, 3 varieties of Chikkis



Key Product – Soya Bean

In what is a bit of an oddity, the key product of Sresta is Soya Beans. In FY15, the revenue from Soya Beans was Rs 29 crore, up from Rs 22 crore in FY14. Volume of sales was 6574 tons, at an average price of Rs 44/kg.

Retail Presence

24 Mantra organic food brand is available across India and abroad.

The company sells over 200 products through 10,000 retail stores in 150 cities in India. It claims presence in hypermarkets (modern retail), neighborhood super markets and stores (general stores), dedicated organic stores, its own franchisees stores and a new concept of self -dispensing bulk stores where consumers can buy loose and by the scoop are the different formats in which we are building the retail distribution channels.

24 Mantra organic is available in all leading retail chains ABRL, Auchan, Metro, Food Bazaar, Hyper City, Wal-Mart Best Price, Spencer’s, Godrej Nature’s Basket, Tesco Star Bazaar and many more.

The company also direct to consumer through its website www.24mantra.com

Exports

Exports is around 50% of Sresta’s sales mix. Share of exports has come down from 68% in FY09. It exports several products like Ready-to-eat rice, Curries, Chutneys, Pickles, Curry pastes, Masalas and Spices etc.

Sresta has direct presence in the USA, with atleast three major wholesale outlets in the country – Washington DC, Chicago and San Francisco in CA. It has presence in Houston too and plans to slowly expand to other cities Subsidiaries

FYVE Elements LLC

FYVE Elements LLC is a wholly owned subsidiary of the Company which was incorporated on November 30, 2012 under the laws of the State of

Maryland, USA. Their main business is Whole-sale retail distribution of food products and related items, covering whole of USA. During the year under review, the Company has invested an amount of Rs. 13.9 Million.

Sresta Global FZE

Sresta Global FZE is a wholly owned subsidiary of the Company which was incorporated on 3 rd October 2012 under the laws of the State of RAK, UAE. Their main business is trading of food products and related items. During the year under review, there is no further investment made by the Company.

MANUFACTURING FACILITIES

Sresta has its manufacturing facility and storage facilities in Hyderabad as described in the earlier section. However, its gross block is much smaller compared to say Morarka Organic Foods, which has an asset base 10x bigger than Sresta.

FINANCIAL PERFORMANCE

Sresta has done extremely well on the revenue front, posting a CAGR of 62% over FY10-15.

http://www.24mantra.com/



Around 50% of its revenue comes from the local market, which shows that its efforts of building an organic food brand could be paying off.

However, profitability is still poor. While it is not making losses any more, net profit is almost negligible. There appears to be marginal improvement in EBITDA margin.

The company is well capitalized though, since PE funds have been supporting it with regular fund infusions. The company has negligible debt.

However, the company will continue to need external funding support give negative operational cash flow. The working capital cycle is quite large at around 125 days. Lets assume in FY16, the company added Rs 60 crore of sales. This would require Rs 20 crore of working capital. Cash generation from P&L being negligible, this needs to come from external funding (either bank lines or equity or a mix).

Please Note: This appears in FY15 financial filing. During the year a cyber fraud was committed on the company by hacking the e-mail ID of an employee and funds aggregating to USD 6,15,070 (equivalent to INR 3,74,75,213) payable by an overseas customer (unrelated) to the company for direct supplies (exports) made and supplies routed through the wholly owned subsidiary, Siesta Global FZE, Dubai were diverted to the bank accounts of unknown entities. On reaching an out of court settlement the company could realize a part of the funds so diverted and the balance (INR 1,12,79,432) was agreed to be foregone and was written off as a bad debt. Ref Note No. 7 of Additional Notes on Accounts to the financial statements.

FUTURE GROWTH PLANS

As part of the plans the company announced entry into two new categories -- Ready to Drink and Ready to Cook products, in Feb’16.

Five variants of the Ready to Drink -- Orange, Mango, Berry, Apple and Lemon Green Tea flavours -- and four variants of Ready to Cook breakfast options -- Millet Dosa Mix, Ragi Idli Mix, Gojji Avalakki and Kanda Poha -- have been launched

Over the next four years, the company, Mr. Seelam said, wanted to increase the acreage under organic farming, carried out on a group farming basis, to 5 lakh acres from the existing 1.5 lakh acres.

The expansion plans would see the headcount going up from 250 at present to 800.

FUNDING

Sresta has raised several rounds of funding from the two PE funds, aggregating over Rs 60 crore. The PE funds have been invested for several years now, and could be looking for an exit soon. As per their Shareholders Agreement, the company needs to give them an exit by Dec’15, or be prepared for drag along etc.

We show below (see tables below) some the investment rounds done, and the price per share implied in them.

As per the last round of dilution, in Jun’15, the price per share was Rs 125. Multiplying this by fully diluted shares (1.76 crore), we get a valuation of Rs 220 crore. This implies a valuation of around 2x trailing sales.



FINANCIAL DETAILS

P&L (Rs mn) FY11 FY12 FY13 FY14 FY15

Net Sales 180.0 270.0 460.8 796.3 1134.8 EBITDA 2.1 1.8 19.1 24.5 82.1 Margin (%) 1.2 0.7 4.1 3.1 7.2 Interest 0.0 0.0 3.8 7.8 15.7 Other Income 0.0 0.0 8.8 29.5 0.0 PBDT 2.1 1.8 24.1 46.1 66.5 Depreciation 1.6 0.0 21.3 43.3 58.6 Extraordinary Item

PBT 0.6 1.8 2.8 2.8 7.8 PAT 0.2 0.1 1.9 2.1 4.9 PAT Margin (%) 0.1 0.0 0.4 0.3 0.4

Balance Sheet

(Rs mn) FY11 FY12 FY13 FY14 FY15

Liabilities

Equity Capital 76.7 108.3 133.2 147.1 175.3 Reserves 36.0 155.5 212.8 305.2 538.0 Shareholder Funds 115.9 263.8 346.1 452.9 713.3 Other long term liabilities 27.8 0.8 1.4 2.0 35.7 Total Liabilities 144.0 264.5 347.5 455.0 749.0

Assets

Fixed Assets (net) 12.0 24.9 38.9 39.0 89.4 Oher Long Term Assets 5.9 45.0 86.8 126.6 182.2 Total Long Term Assets 48.0 98.3 153.2 192.3 295.5 Inventories 42.4 92.8 131.6 186.9 389.5 Debtors 51.0 65.6 101.8 211.5 316.3 Cash 0.3 3.7 5.5 2.8 1.1 Other CA 0.1 33.8 32.8 73.3 89.1 Total Current Assets, L&A 100.2 220.2 282.5 494.4 817.6

CL & Provisions 11.9 53.9 88.2 231.8 364.2 Net Current Assets 88.3 166.3 194.3 262.6 453.5 Total Assets

144.0 264.5 347.5 455.0 748.9



Ratios

FY10 FY11 FY12 FY13 FY14 FY15

Growth (%) Sales -5.2 78.2 50.0 70.7 72.8 42.5

PBDIT -26.1 -108.5 -15.4 955.8 28.2 235.3

PBT -18.3 -102.3 229.1 54.1 1.2 177.4

PAT -16.1 -101.3 -72.7 3115.0 6.8 137.5

Margins (%) PBDIT -25.0 1.2 0.7 4.1 3.1 7.2

PAT -16.8 0.1 0.0 0.4 0.3 0.4

Balance Sheet Ratios ROE (%) -14.7 0.2 0.0 0.6 0.5 0.8

ROCE (%) -18.8 0.4 0.9 -0.7 -4.7 3.9

D/E (x) 0.4 0.2 0.0 0.0 0.0 0.0

Inventory t/o (days) 92.3 64.5 91.4 88.9 73.0 92.7

Debtors t/o (days) 50.3 75.4 78.8 66.3 71.8 84.9 WC Cycle (days) 119.3 126.3 153.4 133.1 122.1 137.4

Dilution History

Date Fund Shares Total (Rs L) Price/Share

30-Dec-10 VentureEast Trustee Co 7,82,855 200 25.5

27-Jan-11 VentureEast Life Fund III LLC 917 0 31.4

20-Sep-11 Peepul Capital III LLC 31,30,505 1,508 48.2

28-May-14 Peepul Capital III LLC 5,28,682 500 94.6

28-May-14 VentureEast Life Fund III LLC 3,04,924 288 94.6

28-May-14 VentureEast Trustee Co 2,23,758 212 94.6

CCPS

27-Jan-11 VentureEast Life Fund III LLC 15,90,000 288 31.3

21-Jun-13 Peepul Capital III LLC 8,33,333 500 60.0

21-Jun-13 VentureEast Life Fund III LLC 4,80,635 288 60.0

25-Jul-14 Peepul Capital III LLC 15,62,500 1,250 80.0

25-Jul-14 Peepul Capital III LLC 9,01,192 721 80.0

25-Jul-14 VentureEast Trustee Co 6,61,308 529 80.0

26-Jun-15 VentureEast Life Fund III LLC 91,028 114 125.0



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